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Objective 5 Flashcards

1
Q

What are the Five Subfactors considered by S&P in the ERM Analysis?

(ERM123)

A
  1. Risk management culture;
  2. Risk controls;
  3. Strategic risk management;
  4. Emerging risks management;
  5. Risk models.
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2
Q

What are the S&P ERM Assessment Scores?

(ERM123)

A

1 - Very Strong

2- Strong

3 - Adequate with strong risk control

4 - Adequate

5 - Weak

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3
Q

Guideline for “1 - Very Strong” ERM Assessment

(ERM123)

A

Positive score for all 5 risk subfactors;

Good/Superior EC Model

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4
Q

Guideline for “2 - Strong” ERM Assessment

(ERM123)

A

Positive score for (a) risk management culture, (b) risk controls, and (c) strategic risk management,

Neutral for the rest,

No negatives.

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5
Q

Guideline for “3 - Adequate with strong risk control” ERM Assessment

(ERM123)

A

Positive score for risk controls subfactor,

Neutral for the rest.

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6
Q

Guideline for “4 - Adequate” ERM Assessment

(ERM123)

A

At least neutral (a) risk controls and (b) risk management culture;

Does not satisfy requirement for adequate with risk control.

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7
Q

Guideline for “5 - Weak” ERM Assessment

(ERM123)

A

Negative in (a) risk controls, and/or (b) risk management culture

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8
Q

Four key areas of “Risk management culture” risk subfactor

(ERM123)

A
  1. Risk governance and organization structure;
  2. Risk appetite framework;
  3. Risk reporting and communication;
  4. Incentive compensation structures.
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9
Q

What does the “Risk Controls” subfactor focus on? What are the main risk categories?

(ERM123)

A

The processes and procedures used to manage key risk exposures within the areas:

  • credit and counterparty risk;
  • equity risk;
  • interest risk;
  • insurance risk (including reserving);
  • operational risk.
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10
Q

What are 6 key components of the Risk Control process?

(ERM123)

A
  1. Risk identification;
  2. Risk measurement and monitoring;
  3. Risk limits and standards;
  4. Risk management (to stay within limits);
  5. Risk limit enforcement;
  6. Risk learning.
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11
Q

What is the focus of the “Strategic risk management” subfactor?

(ERM123)

A
  • Evidence of strategic decisions using economic risk/reward metrics + risk appetite;
  • Balance of regulatory and accounting considerations;
  • Choice and outcome of strategic decisions
  • Risk/reward rationale in the chosen strategy.
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12
Q

What does the “Emerging Risk Management” subfactor focus on?

(ERM123)

A

How the insurer addresses risks that are not a current threat to creditworthiness, but could become one in the future

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13
Q

What are four uses of “Risk Models”?

(ERM123)

A

1) Measure risk exposures;
2) Test correlation and diversification;
3) Validate risk mitigation strategies;
4) Quantify capital requirements for a given risk profile.

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14
Q

What risk models are analyzed in the “Risk Models” subfactor?

(ERM123)

A
  • Distinct risk and enterprise risk aggregation models;
  • Day-to-day operations (e.g., pricing, valuation, projections;
  • EC model
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15
Q

Is the existence and use of an EC model a pre-requisite for a positive “Risk Models” subfactor score?

(ERM123)

A

No

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16
Q

Define “Strategic risk management”

(ERM123)

A

Process through which insurers facilitate the optimization of adjusted returns, starting with (1) a view of the required risk capital and (2) a well-defined capital allocation process.

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17
Q

Definition of “Risk appetite”

(ERM123)

A

Framework that establishes the risks that the insurer wishes to acquire, avoid, retain and/or reduce

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18
Q

Definition of “Risk preferences”

(ERM123)

A

Qualitative risk appetite statements

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19
Q

Definition of “Risk tolerances”

(ERM123)

A

Quantitative risk appetite statements

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20
Q

Definition of “Risk limits”

(ERM123)

A

Quantitative boundaries that constrain specific risk-taking activities at the operational level

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21
Q

What is the general ORSA methodology?

(ERM126)

A
  • Varies from territory to territory;
  • No prescribed methodology;
  • Should be proportionate to (the insurer’s own view of) the nature, scale and complexity of the risks.
22
Q

ORSA’s 9 Key objectives

(ERM126)

A
  1. Allocate Board responsibly;
  2. Facilitate own risk assessment;
  3. Facilitate own solvency assessment;
  4. Ensure an appropriate forward-looking perspective;
  5. Be used as a key management information tool;
  6. Enhance internal and supervisory understanding;
  7. Provide a group-wide assessment;
  8. Ensure a continuous process;
  9. Ensure adequate documentation.
23
Q

What is ORSA intended to achieve?

(ERM126)

A
  1. Assess the risks a insurer faces;
  2. Assess the amount of capital it required to protect against those risks;
  3. Document its assessment of risks and capital requirements.
24
Q

Who is responsible for ORSA?

(ERM126)

A

The Board, whom is also responsible for making sure the insurer doesn’t take more risk than the capital base allows.

25
Q

What is documented as part of ORSA’s “Own risk assessment” objective?

(ERM126)

A
  • The risk management framework;
  • The outputs from the risk management system;
  • Material risks and their assessment;
  • Governance and internal control system
26
Q

What is documented as part of ORSA’s “Own solvency assessment” objective?

(ERM126)

A

Under regulatory requirements and the insurer’s EC model,

  • solvency position;
  • capital required;
  • analyze and reconcile differences, if any;
  • stress and scenario testing;
  • financial resources / new capital availability;
  • how capital issues and risks are addressed
27
Q

What is assessed in “Forward looking assessment of solvency needs”?

(ERM126)

A

Project future risks with levels of new business for the business plan time horizon (usually 3-5 years)

28
Q

What are the 3 lines of defense?

(ERM126)

A
  1. Business units
  2. Control functions (risk management, compliance, actuarial)
  3. Internal audit
29
Q

What are 3 applications of ORSA as a “Key management tool”?

(ERM126)

A
  1. Determining strategy and product development;
  2. Developing potential management actions;
  3. Align strategy, risk appetite, and capital requirements in the overall risk management framework. This includes:
  • pricing,
  • capital plans,
  • strategic plans,
  • setting risk appetite,
  • investment policy,
  • compensation aligned with adjusted performance
30
Q

What is the scope of ORSA in terms of “Internal and supervisory understanding”?

(ERM126)

A

Facilitate an ongoing dialogue between management and supervisors;

Enhance understanding of the business on both sides.

31
Q

What should ORSA include as far as “Group assessment” goes?

(ERM126)

A

All legal entities of the group, and should address specific group issues.

32
Q

How frequent should ORSA be done?

(ERM126)

A

Regularly, at least annually (depending on the regulator).

Triggering events include:

  • acquisition or disvesture,
  • significant change in the market,
  • change to type or level of new business
33
Q

What are ORSA best practices in terms of independent assessment?

(ERM126)

A

Should be done, although some countries don’t explicitly require it

34
Q

What are the main IAIS requirements for ORSA?

(ERM126)

A
  1. Assessment of overall solvency needs;
  2. Forward looking assessment;
  3. Role of the board;
  4. Use of ORSA;
  5. Frequency of performance;
  6. Group requirements;
  7. Reporting to supervisors and disclosure;
  8. Documentation required;
  9. Proportionality;
  10. Independent review
35
Q

What does a “countinuity analysis” entail, in the context of IAIS’ ORSA requirements?

(ERM126)

A
  • Ability to continue in business;
  • Risk management and financial resources required to do so over a longer time horizon > capital requirements horizon
36
Q

How is RBC Ratio calculated?

(ERM501)

A

Total Adjusted Capital / Authorized Control Level

37
Q

How many outcomes to the RBC calculation are there?

(ERM501)

38
Q

What is the “No action” RBC ratio range?

(ERM501)

39
Q

What is the “Company Action Level” RBC ratio range?

(ERM501)

A

(150%, 200%)

40
Q

What is the “Regulatory Action Level” RBC ratio range?

(ERM501)

A

(100%, 150%)

41
Q

What is the “Authorized Control Level” RBC ratio range?

(ERM501)

A

(70%, 100%)

42
Q

What is the “Mandatory Control Level” RBC ratio range?

(ERM501)

43
Q

What occurs at the “Company Action Level”?

(ERM501)

A

The company submits a report to the regulator which identifies conditions that contributed to the company’s financial situation, with proposals to correct this.

44
Q

What occurs at the “Regulatory Action Level”?

(ERM501)

A

The company submits an action plan, and the state insurance commissioner is required to perform examinations or analyses.

45
Q

What occurs at the “Authorized Control Level”?

(ERM501)

A

Regulator can take control of the insurer, though the insurer might still be technically solvent.

46
Q

What occurs at the “Mandatory Control Level”?

(ERM501)

A

Regulator MUST take steps to place insurer under control, as the insurers is technically insolvent.

47
Q

What RBC Ratio is required to be subject to a “Trend Test”?

(ERM501)

A

Life: (200%, 250%)

P/C: (200%, 300%) AND Combined Ratio > 120%

Health: (200%, 300%) AND Combined Ratio > 105%

48
Q

What is the “Trend Test”?

(ERM501)

A

Calculates the greater of the decrease in the margin between the current year and prior year, and the average of the past three years.

49
Q

What is the Health RBC Formula?

(ERM501)

A

H0 + sqrt[H12 + H22 + H32 + H42],

where

H0 = Asset Risk Affiliates

H1 = Asset Risk Other

H2 = UW Risk

H3 = Credit Risk

H4 = Business Risk

50
Q

What is the P/C RBC Formula?

(ERM501)

A

R0 + sqrt[R12 + R22 + R32 + R42 + R52],

where

R0 = Asset Risk Subsidiary

R1 = Asset Risk Fixed Income

R2 = Asset Risk Equity

R3 = Asset Risk Credit

R4 = UW Risk Reserves

R5 = UW Risk Net Written Premium

51
Q

What is the Life RBC Formula?

(ERM501)

A

ACL RBC =

C0 + C4a + sqrt[(C1o+C3a)2 + (C1CS+C3c)2 + C22 + C3b2 + C4b2]

where

  • C0 - asset risk affiliates
  • C4a - business risk
  • C1o - asset risk other (excl common stock)
  • C3a - interest risk
  • C1CS - asset risk common stock
  • C3c - market risk
  • C2 - insurance risk
  • C3b - health credit risk
  • C4b - business risk (health portion)

ERM Exam (6 decks)

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